The Reckoning

Entitlement programs are consuming an ever-larger share of the federal budget. Does the next president have a plan to deal with the problem?

Last year, the oldest members of the baby-boom generation turned 65, leading the demographic bulge that will come to dominate the nation’s entitlement programs, federal budgets, and political debates for years to come. Every day until 2030, 10,000 Americans will age into Medicare and Social Security, even as the proportion of young working people paying into the programs shrinks.

The graying of the population presents some difficult math, and it is complicated even more by the economic downturn’s hit on income-based entitlement programs, including Medicaid and food stamps, that have seen their enrollments surge. The Congressional Budget Office estimates that Social Security will grow from 5 percent of gross domestic product to 6.2 percent in 25 years, while Medicare will rise from 3.7 percent to 6 percent of GDP. Recent updates from the Medicare and Social Security trustees estimate that the retirement fund will be insolvent in 2033 and that Medicare will go broke even sooner; the hospital trust fund is expected to start owing more than it collects in 2024.

Mitt Romney sees those numbers and concludes that Washington must overhaul the entitlement programs to prevent a fiscal calamity. Taking his lead from his running mate, House Budget Committee Chairman Paul Ryan, R-Wis., Romney proposes big changes in Medicare and Medicaid that he says will improve the budget picture without robbing the country of a crucial safety net.

President Obama’s reform proposals sidestep sweeping change. He would retain the basic structure of the entitlement programs but hope, in the case of Medicare, that changes already enacted will reduce health care costs. His 2010 Affordable Care Act actually expands benefits for seniors and offers tax credits to middle-income Americans to buy health insurance. But it also commences a series of behind-the-scenes initiatives designed to hold down spending.

On their face, the two candidates’ visions for entitlement reform look quite different. And they would likely feel very different to beneficiaries. But they are based on the common belief that Medicare spending, at least, can no longer be open-ended. Obama plans to use government oversight to enforce new budget targets in the program. Romney would use consumer choice and market pressure to achieve quite similar goals.

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Both candidates are mindful of the political risks involved in suggesting changes to entitlement programs, particularly those affecting the elderly. Regardless of their political leanings, older Americans are typically wary of alterations to the benefits they have come to rely on—or expect to receive when they retire. A recent Kaiser Family Foundation poll that tracks attitudes on health care issues found that 70 percent of seniors—including 53 percent of Republicans—would reject any change to Medicare’s benefit structure. They are similarly unenthusiastic about cuts to Social Security.

It’s worth noting that, despite attacks and counterattacks, neither candidate’s plan completely addresses the demographic pressure facing entitlements. On Social Security, Obama and Romney have remained fuzzy, despite widespread agreement among experts that to remain viable, the program will likely require reduced benefits and higher taxes for some recipients, as well as increases in the eligibility age. On Medicare, both men have focused their policies on reducing spending per beneficiary, a strategy that will lower costs somewhat but probably not enough to compensate for all of the program’s coming enrollees.

OBAMA’S APPROACH

The president has already chosen his main path for entitlement reform. It’s called the Affordable Care Act. The health care law included Medicare and Medicaid reforms that Obama believes will transform the medical system, driving down spending without reducing benefits to seniors. The idea is that by making the health care system nationwide more efficient, the government can moderate spending on seniors, whose consumption of health care has consistently risen faster than the growth of the economy—and had even before their numbers swelled. “My own deficit plan would strengthen Medicare and Medicaid for the long haul by slowing the growth of health care costs—not shifting them to seniors and vulnerable families,” Obama said in a speech on the economy in June.

The law includes pilot and incentive programs to move Medicare payments away from the current model, where doctors and hospitals are paid for every service they offer, to one that rewards providers for keeping patients healthy at low cost. But it includes some budget cuts and payment ceilings that would theoretically slow spending even if the experiments don’t work.

On the goodies side, the law expands certain benefits for seniors. Over time, it closes the so-called doughnut hole, the gap in coverage that obliges seniors to pay out of pocket for prescription drugs. It requires insurers to cover a set of preventive services without co-payments. And it creates a system of tax credits to help non-elderly middle-income Americans buy private plans.